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Friday, March 4, 2011

Why aren't the jails filled with bankers?

I have been trying to write this post for a while but every time I try to get a grip on it the whole thing gets uglier, bigger, and more complicated. I'm a criminal defense lawyer by trade so I don't normally think that more people should be in jail so in some ways this goes against my most basic instincts. But after reading "The Big Short," Michael Lewis's account of the recent financial collapse and those who saw it coming, I was amazed at the breadth and depth of what seemed to me to be fairly obvious fraud.

On the heels of my reading the book came Matt Taibbi's Rolling Stone article "Why Isn't Wall Street in Jail?" Taibbi does a nice job of summing up some of the most basic problems with prosecuting the bankers and others on Wall Street. The SEC is intellectually out gunned by the law firms and banks and indeed, the main aspiration of those at the SEC and federal prosecutors who handle financial cases seems to be a job with those banks and law firms. Taibbi gives a picture of the revolving door that is shocking and depressing.

Taibbi also points out that there are no lack of federal prosecutorial resources out there, citing the 393,000 people deported last year at a cost of $5 billion dollars. Would all of those people put together have been able to the damage that he bankers did to this country? In another example federal prosecutors in Northern California spent nine years and untold millions of dollars attempting to get a death sentence against a man who is already on death row in California. They failed.

And where has the media been on all this. Other than Taibbi's piece in the not-exactly-main-stream Rolling Stone they have been nowhere. In the New York Times columnist Joe Nocera recently penned a shoulder shrugging column essentially concluding that it was just too hard to make these cases, though he also noted that the government is putting neither the resources nor the effort in that would be needed to do so.

The argument that these guys just can't be got seems rather weak. Yves Smith, at the indispensable Naked Capitalism, lays out a pretty straightforward plan for how to do just that, though admits there is little prospect of it happening. Another pretty good argument was made recently on the blog FireDogLake.

And it should be clear that the only way to deter this kind of thing in the future is to go after the money and freedom of the people at the top of these institutions. Way back in 2009, in an excellent and courageous action, Federal District Court Judge Jed Rackoff rejected a proposed settlement between Bank of America and the SEC over the Banks fraud in failing to disclose the bonuses paid to Merill Lynch executives on the eve of that firm's takeover by Bank of America. Central to Rackoff's critique was that the kind of civil fines against that the SEC was proposing that BofA pay are a sham. As the judge put it

the parties were proposing that the management of Bank of America – having allegedly hidden from the Bank’s shareholders that as much as $5.8 billion of their money would be given as bonuses to the executives of Merrill who had run that company nearly into bankruptcy – would now settle the legal consequences of their lying by paying the S.E.C. $33 million more of their shareholders’ money.

And this really goes to the heart of the matter. When the companies, rather than the individuals who run them are punished, there is no deterrent. And such a deterrent is desperately needed. Nothing could be clearer in the wake of the financial ruin wrought by these banks. The bankers and executives don't care if they destroy the institutions at which they work as long as they get to pocket a few hundred million and walk away from the disaster.

And what of the shareholders. Of course their interests are supposed to be guarded by the Board of Directors. But what do you know today the New York Times reported that the SEC is essentially giving a pass to the members of those Boards absent "severe recklessness."

And the regulators? Even when the fraud is undeniable, and provides an opportunity to force the banks, which received billions in tax payer bailouts, into giving a break to homeowners, the banks' main regulator fights to do as little as possible.

So is there any hope that anyone will be punished. Probably not. However, in my experience there is nothing that a prosecutor loves more than a jail house snitch so maybe something will come of the New York Times interview with Bernie Madoff in which he says the banks had to know about his fraud. I would think it would look very familiar to them indeed. After all, it takes one to know one.